Housing Dilemma….Part 1

As I have mentioned in previous posts in 2017, I am struggling with a Housing Dilemma which has paralyzed me for the last month and a half. It took me some effort to break out of it and write this post. In this post on my Housing Dilemma (Part 1), I will try to detail two big dilemmas I am facing. Your feedback will be very much appreciated. In Part 2 of the post, I will write about my decision…which hopefully will give me some peace and closure.

Looking back…

I discovered Financial Independence…kind of by accident around 2003. My first blog post ever via this blog was on 07/21/2014. I re-read that first post again and realized that my goal of FI was 10 years from 07/21/2014 i.e. by 07/21/2024, I should have achieved Financial Independence . To be honest, it was more of a stake-in-the-sand kind of goal rather than a well thought out date based on pure math. But, setting this date has got me far ahead of my expectations from when I started this blog.

My goals when I started this blog…

I went back to read what Financial Independence meant to me. From there, I got the following goals. These early goals were refined a bit more…but they still are the main pillars of my FI strategy.

  1. Emergency Fund for 12 months of expenses
    1. Achieved
  2. Multiple Passive Income Streams that produce $50000 per year for years 50-70
    1. On hindsight, this goal was too aggressive at my current funding level 🙂
    2. Depending on my housing decision, I may need additional funds OR more time. But I am happy with the current progress (Jan 2017) and will surely continue with this goal!
  3. College Fund for my kid
    1. Will be achieved in the next 8 years
  4. A retirement fund that covers 30 years of expenses for years 70-100
    1. Will be achieved in the next 8 years
  5. A paid off roof for my family
    1. The biggest question mark 😦 More on this later
  6. A $100K medical fund to help fix emergency health issues…not sure about insurance with preexisting health issues.
    1. In 10 years, if I do not dip into the emergency fund, that fund will be folded onto the medical fund. And I will need to add some more money of course.
    2. But, will surely be achieved.
  7. Life Insurance to cover my family.
    1. Note that this is insurance coverage outside of work to protect my family.
    2. Achieved!

Biggest Question Mark

Financial Independence to me meant that the family abode was paid off. Basically, zero debt with a healthy passive income to boot was my dream. I have come to realize that the big decision of buying a family abode is comprised of a few smaller decisions:

  • Location:
    • I live in a HCOL (high cost of living) area…can we move out of here to a LCOL (low cost of living) area?
    • For various reasons, moving is not an option for our family. All our connections (family and close friends) are here and uprooting everything is not practical.
  • Money:
    • The best case scenario for me is a mortgage amount of somewhere between $425K to $525K. I analyzed this in three posts….the final one was this. Links to the other two are within.
    • No mortgage => no tax deduction on the mortgage interest. I have been paying more tax than needed for the past couple years while I was building my passive income engine. Need to correct this.
  • Kid’s Deadline:
    • We have moved 3 times within the last 7 years and that has taken a toll on my kid the most…3 different schools and zero long term friends. My kid enters middle school next year and I want to drop down roots before that…most possibly another school change but hopefully the last one until high school. So, I have appx 1.5 years left to buy a house.
  • Satisfaction:
    • After visiting many open houses and considering the needs and wishes of our family (size, school district, space, layout, etc), I have come to the decision that a “satisfactory” house is a 3B/2B SFH in a reasonably good school district with low crime. This will cost me anywhere between $850K to $950K…depending on how far into suburbia I am willing to move to. Trust me, you will not get a mansion for this…welcome to my HCOL area 😦
    • In waiting to buy a house, our family spent a few vagabond years. We were saving up for the down payment as well as building the passive income streams. Whatever house we buy will be the one we will stay for the next 18 years atleast. So, the criterion of a 3B/2B SFH is not something I can relax.

So, it seems to me that the only criterion I can relax are:

  • Money
  • Kid’s Deadline

Depending on which of the above two criterion I relax, there can be a few different directions I can go in. And here comes the dilemma.

Housing Dilemma 1: Relax Money criterion and stick to Kid’s Deadline

A mortgage size between $425K and $525K will fit into my FI window. Assuming the worst case cost of $950K for a house, I will need a down payment of $325K to even bid for the house. I have some down payment money but accumulating $325K will take me many many more years.

Vivianne suggested one way: sacrifice some retirement funding to build this down payment up.The stock market is at insane levels…so, perhaps not investing in 401K for a year is not a bad idea. Cons are:

  • Even if I stop investing in 401K and stop adding new funds to my passive income streams, I can save a max of $20K to $25K over the next year and a half.
  • 401K funding is the only tax-efficiency move I have going for me….don’t want to lose this…
  • Can I sacrifice my passive income streams? Hmm…..

So, lets say I relaxed my mortgage limit and took a $625K mortgage (analysis)…the jumbo loan limit in my HCOL area. This means my FI plan will need to be extended to 15 years at least. Say, I am agreeable to this as well. So, what is the dilemma then? Buying at the peak.

One of the good articles that explain what I am trying to say is Case-Shiller House Prices Bubble 1.0 vs today. 2006-2007 was the largest housing bubble in history. And in my HCOL area, prices today are much much more than 2007 prices. If 2007 bubble was the largest bubble, what does it make the house prices we have today? It is really insane 🙂

I concur with the above article as I have personal proof of it. Here is one example of a sfh that a friend bought in Dec 2007….

  • Dec 2007: 922K
  • Dec 2009: 699K
  • Dec 2013: 883K
  • Dec 2016: 1200K

Even if I assume that 2016 is Bubble 2.0, if the bubble pops, I cannot expect the prices to go back to 2009 prices…at best, the prices might settle around 883K (2013 prices).

Conclusion: With this background, is this the right time to bug a house? Is this the right time to commit to a huge mortgage that will require mandatory full employment for the next 15-20 years? Even if we deduct mortgage interest deduction of $20-$30k ($625K mortgage @ 4.5%), if the house price drops by 200K, would it be a smart buy? I am not so sure….especially since even refinancing will be ruled out for underwater homes.

Housing Dilemma 2: Relax Kid’s deadline and keep Money 

Lets say I will wait for the house prices to fall to a reasonable value…say appx $800-850K for a sfh 3br/2b home in a reasonably good school district with low crime. Let us say that this price reduction will only happen in 2020 i.e. three years from now. I can save money for the home down payment and still stick to the $525K mortgage. But, this means I have to continue to rent and potentially move again for my kid’s middle school i.e. continue the Vagabond family life 😦

I hate to put my family through another temporary move, but lets see what this option of delaying a home purchase till 2020 brings us.

  • I can save enough money for a down payment to let me pick a $525K mortgage i.e. stick to my FI schedule of 10 years….
  • I am not buying at the peak of the market….a peak which is really really historic. I have seen my close friends struggle in the 2008 housing bubble , lose jobs and houses and saw first hand what devastation it can cause for families.

So, what do I lose by postponing my purchase?

  • Obviously, I feel that I am not being a responsible parent and husband by elongating the vagabond life by another three years.
  • I am going to lose the tax benefits of a mortgage…most probably in the highest earning years of my life….i.e. when I could most benefit from a deduction in taxes.
  • House prices may rise up even more….hey, anything is possible 🙂

I cannot do anything about the first con and the third is not realistic in my opinion. But I can do something about the second. What if I purchased one or more cash-flow positive rentals in a LCOL area? Here are some positives:

  • Use leverage to add one more income stream
  • Diversify my income stream to include rental income along with dividend income
  • Get the mortgage tax deduction

Some negatives are:

  • The rental purchases also will be at the top of the housing market bubble…unless I identify a market that is not so frothy.
  • Remote rental management…lack of time is so prevalent in my life now…so, how does one manage remote properties? Can I identify a rental management agency to help me out? Doable but will take some work.
  • If housing market falls in 2018, I will not have enough money to take advantage of it.

Conclusion: With this background, is this the right time to postpone purchase of family residence and buy a rental property instead? I will be getting the tax benefit and hopefully get the renters to pay off most of the mortgage. And over time, diversify my passive income stream as well. Am I being too selfish in signing up my Kid and wife for few more years of Vagabond life?

Readers

If you have read this far, I truly appreciate it! As I said before, the above two dilemmas have paralyzed me for the last month and a half. If I may ask one favor, do you have any thoughts on how I can solve my dilemma? Which option should I pick: Dilemma 1 OR Dilemma 2? Am I missing any pros/cons in each dilemma? Feel free to share your valuable opinions! Thank you very much!

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Financial Independence Progress Report for January 2017

The first month in the new year is done and it is time for the monthly update!

For the first time in the last couple of years, I am struggling with what should be my yearly goals for 2017. There are some basic goals that I will carry over from last year…like college fund, retirement fund, etc. But my struggle is mainly with the housing goal and that in-decision is affecting a couple other goals. But, I think I am getting closure on this issue and will update on the decision soon.

But for now, lets look at the numbers for Jan 2017.

02/05/2017
Emergency Fund $60K 100.0%
College Fund (80K) 47.95% 49.58%
Passive Income (2016 vs 2017) $592.90 (01/2016) $441.42 (01/2017)
Retirement Fund 64.27% 65.07%
Roof for our Family($750K) 00.00%
Medical Fund 00.5%
Life Insurance Done (term life insurance policy)

Main Takeaways this month

  • Passive Income Stream
    • Passive Income for Jan 2017 (441.42) is appx 30% lower than Jan 2016 ($592.90). This is a big decrease but an expected one 🙂
      • I sold all my ESPP shares from a previous employer and moved them into a couple different mutual funds. Basically cashed out for better risk diversification….shares in only one dividend company vs shares in many dividend paying companies.
      • The ESPP shares had an odd dividend payout frequency: Jan, April, July and October. Post the sale, dividends for these months will take a hit this year, but they will be more than compensated by investments with normal cycle of dividends in Mar, June, Sept and December.
  • Additional Investments
    • International exposure
      • Just like prior months, I continued to increase my exposure outside the US. Stocks in United States are way to overvalued and frothy in my opinion. I want my passive income stream to come from many countries all over the world as a good means of diversification.
      • So, I added to my existing investments in an Emerging markets fund (VEIEX) and Developed Markets International fund (VTMGX).
    • Build a tiny cash fund again
      • Since I have stopped investing in US stocks, I am accumulating that money in a money market fund. When the market tanks later this year, I want to have a small cash fund accumulated to take advantage of the dip.
  • Medical Fund
    • I signed up the family for a High Deductible Health Insurance Plan and got access to a Health Savings Account (HSA). $6750 of pre-tax money can be saved in it. HSA money is eligible for all valid medical expenses…free of federal and state taxes.
    • This will begin the accumulation of the Medical Fund. I have accumulated a couple of nasty health issues through all the ups and downs in life…this makes a medical fund an absolute necessity for my later years.
    • My hope is that the family medical expenses are small enough to be able to pay out of pocket now and let the HSA funds compound over the years. Lets see how it goes.